The operating statement - Essay Example

Variable costs are costs are those, which vary with the level of activity while fixed costs are those, which are constant irrespective of the level of activity. However, the increase or decrease of fixed costs is not related to the level of activity alone as they may though change over a period. Variable costs on the other hand are directly related to the business activity; they include costs such as those for raw materials and inventory. They vary in the sense that the more of each you need in production the more the costs will increase (Czopek 2004).

When the budgeted of these costs is more than the actual, then the discrepancy is termed as an adverse and a control measure must be put in place in actual/real time (Czopek 2004). The operation statement will therefore help the management in identification of each of the costs, when they are favorable as well as when they are adverse and formulate the control mechanisms for normal operations. As there is no single direct way or strategy of cost management and control, the mangers will be forced to examine the whole business strategy and make a determination of how to achieve a cost reduction without interfering with the business operations.

Variable cost control Variable costs will rise with expansion in production and fall when production falls; this is quite useful for effective decision-making. They include costs such as those for raw materials, packaging and direct labor (Czopek 2004). The operating statement shows clearly a Budgeted gross profit of 18339.30 pounds. As indicated by the variable costs variances, they are adverse as shown: - Sales volume profit variance = (2,130 – 2,100) ? 8.61 = ?258.3 (A) and Sales price variance = (15.0 – 14.5) ? 2,100 = ?1,050.0 (A). Material M3 price variance = (1.55 ? 1,050) – 1,680 = ?52.5 (A), Material M3 usage variance = ((2,100 ? 0.6) – 1,050) ? 1.55 = ?325.5 (F), Material M7 price variance = (1.75 ? 1,470) – 2,793 = ?220.5 (A) and Material M7 usage variance = ((2,100 ? 0.68) – 1,470) ? 1.75 = ?73.5 (A).

Direct labor rate variance = (7.2 ? 525) – 3,675 = ?105.0 (F), Direct labor efficiency variance = ((2,100 ?14/60) – 525) ? 7.2 = ?252.0 (A), Variable overhead expenditure variance = (2.1 ? 525) – 1,260 = ?157.5 (A), Variable overhead efficiency variance = ((2,100 ? 14/60) – 525) ? 2.1 = ?73.5 (A). In order to achieve the budgeted profit, the management will have to do something about the adverse variable cost variances, which include those for labor, raw material in terms of material usage and the variable overheads.

Material M3 whose price variance is adverse with its usage favorable, the management can look for a cheaper substitute of the same material to curb the negative variance. Depending on the cause of adverse material price variance as indicated by material M7, management will find out, if it is caused by changes in purchase prices, they can find a substitute. If it is caused by substitution of the original with a new material, the management will decide to go back to the original raw material. The management by help of the operating statement will be able to device other ways of controlling the adverse material cost variance by deciding to look for materials which have cash discounts and buying from suppliers who offer transportation and storage as after sales services.

Direct labor rate variance is favorable with direct labor efficiency variance being unfavorable at 252.0 pounds. The management is therefore able to know the causes of